Is Starbucks a Real China Success Story?

STARBUCKStarbucks has its “Coffee of the Day” and the business press has its strategic success of the moment.  Looks like we already passed the euphoria showed two months ago, when we were getting a double shot of them both. All the major media were talking about the success of Starbucks in China. From the international business press to local magazines to China-based business associations like the American Chamber of Commerce’s guest speakers and many blogs, experts tout Starbucks as the poster child of China market-entry strategy success.

Major consumer brands, especially in F&B, are integrating themselves across all China, not just the prosperous East coast.  In the not so distant past it was common for residents of western China who started to move up the economic ladder to migrate to wealthy eastern coastal cities. Beijing (Government) wants these emerging middle-class citizens to stay home and is enacting incentives and policies to manage migration. By further developing the increasingly nationwide high-speed railway system the government want to ensure the East bonanza moves West. The same trend is true for private companies.  Even though the media focused on Starbucks repurchasing their eastern franchises, it is obvious Starbucks and other foreign name brands are turning their attention and expansion plans West.

I am an expat living in China since 1998. In 2010, I worked for a design company that renovated retail locations for apparel brands. At that time many renowned companies announced their supposed success by publishing the number of new franchises. What I learned during that experience is that companies are eager to announce new location openings, they avoided mention of location closures.  Nor did they widely publish their net retail presence to bolster reports to shareholders and the general public.  This is particularly true for established F&B franchises.  Many of the sites we were turning into clothing stores had formerly been fast-food retail outlets.  Given all this, perhaps you will understand why I am more than a little skeptical about store opening press releases. But to my surprise, one of them breaks the pattern. Starbucks strategic success is being measured by the frequency and volume of its new store openings, but what is more important is that the average age of its existing outlets keeps increasing as the ratio of new openings to closures remains high. Neither of these metrics are being talked about in the recent spate of press being given to the coffee giant.

Instead of using store openings as the only measure of market entry strategy success, we should look at how Starbucks’ localization strategy is playing out.  As Michael Zakkour, et al. write in their Forbes article “Why Starbucks Succeeded In China: A Lesson For All Retailers,” Starbucks has meticulously organized its efforts in China around three key pillars of Chinese society: Family, Community and Status.

Family. Starbuck’s first pillar for success has an indirect effect on customers because when Starbucks talks about family they are talking about staff relatives with the goal of integrating their employees and employee families into company activities. Personally, I have not noticed much difference in the quality of the staff between Starbucks, McDonalds or KFC—at least not enough of a difference to increase my patronage based on customer service (product offering is a different matter). If anything, I have seen a worsening of customer service since Starbucks first entered China, especially in the perceived level of employee training.  For example, before most employees were able to receive and repeat orders in English, which added to the brand prestige—it was also impressive to hear the barista repeat your order of “grande hazelnut latte with skim milk.”  Now it is seldom that I encounter a barista who knows all the product names in English.  Perhaps the price of rapid expansion is lowering training standards.

This lowering of training standards is of particular note because unlike in the US where for many being a coffee barista is a rite of passage between university and a corporate day-job, the majority of Starbucks’ China employees will pursue food service as their professional career.  In many ways, Starbucks new employee training is the primary professional training that will support these workers through their entire career, whether they stay with Starbucks or change companies.

The strategic benefit of Starbucks’ employee family program is not as much customer service as employee retention.  Don’t get me wrong, I know the strong correlation that all-but-proves a happy staff leads to better customer experience, but that correlation is strongest expressed when there is active customer-employee interaction. Starbuck’s standard China operation flow leaves little time for engaging with customers, and customers themselves are less predisposed to chat with the barista.  Efficiencies in phone payment through Alipay and WeChat Wallet have further lessened the little time a customer is in front of a barista, so employee satisfaction has little opportunity to benefit customer experience.  I see this investment in Family as an investment in operational efficiency, not customer experience, by retaining experienced employees longer in an industry known for quick employee turnover.

The pillars of Community and Status are where Starbucks shines with Chinese customers.  Drawing from my experience in retail space design, I believe that Starbucks creates real, valuable customer experience and outperforms competition with its third space concept which is where the coffee giant focuses on Community.  While other coffee retailers optimized getting customers in-and-out the door, Starbucks optimized getting customers through the line and to a table.  Perhaps Starbucks realized that the true customer experience has little to do with barista engagement and all to do with the environment, which is the local retail space itself.  The compromise of lower employee training standards to accommodate faster location expansion is the real Starbucks China strategy.  Arguably, thanks to the growing number of freelance workers who use Starbucks as their de facto office space, perhaps the real competition for Starbucks is not other coffee shops, but shared office spaces.

And Status? Starbucks has played the status card well from day one. Initially a high price-point signaled to consumers that Starbucks is a premium brand. As disposable income has risen in China making Starbucks more accessible to the average middle-class consumer, regular seasonal products and gift sets further reinforced their premium brand image.

Is Starbucks a China success story? Yes, but the metric by which their success should be measured is not new store openings.  Starbucks is and will be successful because they are building a brand and customer experience around the concept of place and linking that concept of location to characteristics and values that best speak to their Chinese consumers.  Focusing on rapid expansion is ignoring the brand and customer experience they have cultivated that supports opening a new location every day.

At Tractus Asia we congratulate them because we understand that a successful China strategy is more complex than simply “if you build it, they will come.”  Starbucks focused on solidifying their brand positioning (with Chinese characteristics) before leaping into expansion.  With our clients, we incorporate consideration for local cultural values in building a holistic market entry approach not only for China, but all our markets.  For more information about how Tractus Asia’s Strategy & Execution and Corporate Finance practices help Build Business in Asia, visit www.tractus-asia.com or follow us on LinkedIn.

Herminio Andres Alija
General Manager – Shanghai office – Tractus Asia Ltd.